ITO 25(3)(1), MUMBAI v. M.D. ENTERPRISES, MUMBAI

ITA 3186/MUM/2010 | 2006-2007
Pronouncement Date: 15-07-2011 | Result: Allowed

Appeal Details

RSA Number 318619914 RSA 2010
Assessee PAN AABFM0244K
Bench Mumbai
Appeal Number ITA 3186/MUM/2010
Duration Of Justice 1 year(s) 2 month(s) 22 day(s)
Appellant ITO 25(3)(1), MUMBAI
Respondent M.D. ENTERPRISES, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 15-07-2011
Appeal Filed By Department
Order Result Allowed
Bench Allotted F
Tribunal Order Date 15-07-2011
Date Of Final Hearing 20-06-2011
Next Hearing Date 20-06-2011
Assessment Year 2006-2007
Appeal Filed On 23-04-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER ITA NO.3186/MUM/2010 ASSESSMENT YEAR:2006-2007 INCOME TAX OFFICER 25(3)(1) R.NO. 307 C-11 3 RD FLOOR PRATYAKSHAKAR BHAVAN BANDRA KURLA COMPLEX BANDRA (E) MUMBAI 400 051. VS. M/S. M.D. ENTERPRISES 44/A GOVERNMENT INDUSTRIAL ESTATE OPP GANESH HOTEL & IPCA LABORATARIES M.G. ROAD KANDIVALI (WEST) MUMBAI 400 067. PAN: AABFM0244K (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.T. JACOB SR. A.R. RESPONDENT BY : SHRI. VIJAY C. KOTHARI O R D E R PER P.M. JAGTAP A.M: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT (A)-XXXV MUMBAI DATED 25 TH JANUARY 2010. 2. THE ASSESSEE IN THE PRESENT CASE IS A PARTNERSH IP FIRM WHICH IS ENGAGED IN THE BUSINESS OF BUILDERS DEVELOPERS AND DEALERS IN REAL ESTATE. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATI ON WAS FILED BY THE ASSESSEE ON 5-09-2006 DECLARING TOTAL INCOME OF RS. 1 63 202/-. DURING THE YEAR UNDER CONSIDERATION THE DEVELOPMENT OF THREE PROJECTS WAS UNDERTAKEN BY THE ASSESSEE OUT OF WHICH ONE PROJECT NAMELY KAVITA WAS STATED TO BE COMPLETED WHEREAS THE REMAINING TWO PROJECTS NAMELY ANAND KUNJ AND ITA NO. 3186/M/2010 A.Y 2006-2007 2 CHETAN BUILDINGS WERE STATED TO BE COMPLETED TO THE EXTENT OF 60% AND 85% RESPECTIVELY. THE ASSESSEE WAS FOLLOWING PROJECT C OMPLETION METHOD AND ACCORDINGLY THE INCOME FROM KAVITA PROJECT WAS OFFE RED BY THE ASSESSEE TO TAX IN THE RETURN OF INCOME FILED FOR THE YEAR UNDE R CONSIDERATION. ACCORDING TO THE ASSESSING OFFICER EVEN THE OTHER TWO PROJEC TS NAMELY ANAND KUNJ AND CHETAN WERE SUBSTANTIALLY COMPLETED IN THE YEAR UND ER CONSIDERATION AS THE ASSESSEE HAD RECEIVED SUBSTANTIAL AMOUNT AGAINST SA LE OF FLATS IN THE SAID PROJECTS. HE THEREFORE HELD THAT THE PROFITS OF TH E SAID PROJECTS WAS ALSO CHARGEABLE TO TAX IN THE HANDS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY HE ESTIMATED THE INCOME OF THE ASSESSEE FROM THE SAID PROJECTS BY APPLYING NET PROFIT RATE OF 10 % TO THE SALE PROCEEDS RECEIVED BY THE ASSESSEE FROM THE SAID PROJECTS UP TO 31-03-2006 AND THE PROFIT SO WORKED OUT AT RS.11 59 980/- WAS ADDED TO BY HIM TO THE TOTAL INCOME OF THE ASSESSEE. DURING THE COURSE OF ASSES SMENT PROCEEDINGS THE ASSESSING OFFICER ALSO NOTICED THAT INDIRECT EXPENS ES OF RS. 29 23 962/- WERE NOT ALLOCATED BY THE ASSESSEE TO WORK-IN-PROGRESS O N PROPORTIONATE BASIS. HE THEREFORE WORKED OUT SUCH EXPENSES ALLOCABLE TO WORK-IN-PROGRESS ON PRO RATA BASIS OF RS. 13 11 915/- AND MADE A DISALLOWAN CE TO THAT EXTENT OUT OF INDIRECT EXPENSES CLAIMED BY THE ASSESSEE. AS FURT HER NOTICED BY THE ASSESSING OFFICER SUNDRY CREDITORS AMOUNTING TO RS . 28 26 498/- WERE OUTSTANDING FOR A CONSIDERABLY LONG PERIOD. SINCE THE ASSESSEE COULD NOT OFFER ANY EXPLANATION IN RESPECT OF THESE LONG OUTS TANDING CREDITORS AND ALSO COULD NOT PRODUCE THE RELEVANT BILLS OF THE SAID CR EDITORS THE AMOUNT OF RS. 28 26 498/- WAS ADDED BY THE ASSESSING OFFICER TO T HE TOTAL INCOME OF THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE ALSO COULD NOT ITA NO. 3186/M/2010 A.Y 2006-2007 3 PRODUCE THE DETAILS OF PROJECTS SHOWN AS WORK-IN-PR OGRESS. HE NOTED THAT THERE WAS A REDUCTION OF WORK-IN-PROGRESS FROM RS. 1 71 59 900/- TO 91 20 053/-. IN THE ABSENCE OF DETAILS FURNISHED B Y THE ASSESSEE AS REQUIRED BY HIM THE ASSESSING OFFICER DISALLOWED 20% OF THE CLOSING WIP AND REDUCED THE SAME TO THAT EXTENT WITH A DIRECTION TO THE ASS ESSEE TO REDUCE THE OPENING WIP BY A SIMILAR AMOUNT IN THE IMMEDIATELY SUCCEEDING YEAR. ACCORDINGLY THE TOTAL INCOME OF THE ASSESSEE WAS C OMPUTED BY THE ASSESSING OFFICER AT RS. 55 14 150/- IN THE ASSESSM ENT COMPLETED U/S 143(3) VIDE AN ORDER DATED 13.12.2008 AS AGAINST TH E TOTAL INCOME OF RS.1 63 202/- RETURNED BY THE ASSESSEE. 3. AGAINST THE ORDER PASSED BY THE ASSESSING OFFICE R U/S 143(3) AN APPEAL BY FILED BY THE ASSESSEE BEFORE THE LD. CIT (A) CHALLENGING THE VARIOUS ADDITIONS MADE BY THE ASSESSING OFFICER TO ITS TOTA L INCOME. AFTER CONSIDERING THE SUBMISSIONS MADE ON BEHALF OF THE A SSESSEE AND THE MATERIAL AVAILABLE ON RECORD THE LD. CIT (A) DELET ED THE ADDITIONS OF RS. 11 59 980/- AND RS. 13 11 915/- MADE BY THE ASSESSI NG OFFICER TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ESTIMATED PROF IT OF TWO INCOMPLETE PROJECTS AND DISALLOWANCE OF PROPORTIONATE INDIRECT EXPENSES RESPECTIVELY. HE ALSO SET ASIDE THE ORDER OF THE ASSESSING OFFICE R REDUCING THE VALUE OF CLOSING WIP BY RS. 18 24 011/-. AGGRIEVED BY THE O RDER OF THE LD. CIT (A) THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TR IBUNAL ON THE FOLLOWING GROUNDS: ITA NO. 3186/M/2010 A.Y 2006-2007 4 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF ESTIMATED PROFIT OF RS. 11 59 980/- MADE BY INVOKIN G PROVISIONS OF SECTIONS 145(3) AND REJECTING THE MET HOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WITHOUT APPRECI ATING THE FACT THAT THE ASSESSEE WAS SHOWING RECEIPTS OF SUBSTANTIALLY COMPLETED PROJECTS AS ADVANCES INSTEA D OF SALES TO DELAY DECLARATION OF PROFITS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT (A) ERRED IN DELETING THE DISALLOW ANCES OF PROPORTIONATE INDIRECT EXPENSES OF RS. 13 11 915/- MADE WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS INDULGING IN DELAYING DECLARATION OF TRUE PROFITS O F TRUE PROFITS BY DEBITING OF THE COST OF OTHER ONGOING PR OJECTS AND NOT SEGREGATING IT PROJECT WISE THEREBY EVADING TA XES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT (A) ERRED IN DELETING THE DISALLOW ANCE MADE BY A.O. OF 20% OF WIP AMOUNTING TO RS. 18 24 0 11/- WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE HA S FAILED TO SUBMIT SUPPORTING EVIDENCES IN RESPECT OF EXPENS ES COMPRISED IN WIP. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT T HE ISSUE INVOLVED IN GROUND NO.1 HAS BEEN DECIDED BY THE LD. CIT (A) IN FAVOUR OF THE ASSESSEE FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 3.3 OF HIS IMPUGNED ORDER. I HAVE CONSIDERED THE SUBMISSIONS OF THE REPRESENT ATIVE AND THE STAND TAKEN BY THE AO. ADMITTEDLY THE APPELLANT W AS FOLLOWING PROJECT COMPLETION METHOD IN THE EARLIER YEARS AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT. THE AO SUDDENLY C HANGED THE METHOD OF ACCOUNTING WITHOUT GIVING JUSTIFIABLE REA SONS IN THE ASSESSMENT ORDER ON THE GROUND THAT THE ADVANCES RE CEIVED BY THE ITA NO. 3186/M/2010 A.Y 2006-2007 5 APPELLANT WAS MORE THAN THE SALES ADMITTED BY THE A PPELLANT. WHILE DOING SO HE HAS RECORDED A FINDING THAT THE PROJECT CHETAN IS COMPLETED UP TO 85% AND ANAND KUNJ IS COMPLETED UP TO 60% BUT HE HAS NOT EXPLAINED IN THE ASSESSMENT ORDER AS TO ON WHAT BASIS HE CAME TO THIS CONCLUSION. AS CONTENDED BY THE RE PRESENTATIVE THE PROJECT COMPLETION METHOD IS A RECOGNIZED METHOD OF ACCOUNTING EVEN AS PER ACCOUNTING STANDARDS AND FOR THE PURPOS E OF INCOME- TAX UNLESS THERE ARE SERIOUS ERRORS COMMITTED BY TH E APPELLANT THE SAME CANNOT BE DISTURBED. THE AO INVOKED SECTION 1 45(3) OF THE I.T. ACT BUT HE HAS NOWHERE POINTED OUT THE DEFECTS IN THE BOOKS OF ACCOUNT TO SHOW THAT THEY ARE EITHER INCOMPLETE OR INCORRECT AND THE METHOD OF ACCOUNTING FOLLOWED IS NOT CORRECT TO ARR IVE AT THE CORRECT INCOME OF THE APPELLANT. AS RIGHTLY CONTENDED BY T HE REPRESENTATIVE WHILE COMPLETING THE ASSESSMENT FOR A.Y. 2007-08 U/S 143(3) ON 29-12-2009 THE AO ACCEPTED THE BOOKS OF ACCOUNTS DEVIATING FROM THE STAND TAKEN BY HIS PREDECESSOR WHICH SHOWS THAT HE ACCEPTED THE METHOD OF ACCOUNTING FOLLOWING BY THE APPELLANT AND EVEN ASSESSED THE INCOME OFFERED BY T HE APPELLANT IN RESPECT OF THE PROJECT CHETAN AND DID NOT ASSESS TH E INCOME IN RESPECT OF ANAND KUNJ AS THE PROJECT WAS NOT COMPLE TE EVEN DURING A.Y. 2007-08. FURTHER THE APPELLANT HAS RECOGNIZED THE INCOME ONCE THE PROJECT IS SUBSTANTIALLY COMPLETED WITHOUT WAITING FOR THE SALE OF THE LAST UNIT IN THE BUILDING WHICH IS EVID ENT FROM THE FACT THAT SAME FLATS WERE INCLUDED WHILE VALUING THE CLO SING STOCK IN RESPECT OF KAVITA BUILDING FOR WHICH THE PROJECT IS COMPLETED DURING ITA NO. 3186/M/2010 A.Y 2006-2007 6 THIS YEAR. THIS MEANS THAT THE APPELLANT IS FOLLOW ING THE PROJECT COMPLETION METHOD AND RECOGNIZED THE INCOME ONCE TH E PROJECT IS SUBSTANTIALLY COMPLET3D AND IT DID NOT DEFER THE RE COGNITION OF INCOME TILL THE LAST UNIT IS SOLD. IN THE CIRCUMST ANCES I FIND THAT THE AO IS NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCOU NT AND RESORTED TO ESTIMATE U/S 1145(3). THE AO IS DIRECTED TO ACCEPT THE INCOME ADMITTED BY THE APPELLANT AND DELETE THE ADDITION O F RS. 11 59 980/-. 5. ADMITTEDLY THE ASSESSEE WAS FOLLOWING PROJECT CO MPLETION METHOD AND AS NOTED BY THE LD. CIT(A) IN HIS IMPUGNED ORDER T HE SAME WAS ACCEPTED IN THE EARLIER YEARS AS WELL AS IN THE SUBSEQUENT YEAR S. IN THESE CIRCUMSTANCES THERE WAS NO REASON FOR THE AO TO TR EAT CHETAN PROJECT AND ANAND KUNJ PROJECT COMPLETED TO THE EXTENT OF 85% A ND 60% AS SUBSTANTIALLY COMPLETED AND BRING PROFIT OF THE SAI D PROJECT TO TAX IN THE HANDS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERAT ION ON ESTIMATED BASIS ESPECIALLY WHEN THE PROFITS OF THE SAID PROJECTS WE RE OFFERED BY THE ASSESSEE TO TAX IN THE RESPECTIVE YEARS OF COMPLETION AND IN THE A.Y. 2007-08 THE PROFIT IN RESPECT OF CHETAN PROJECT WAS ASSESSED TO TAX IN THE ASSESSMENT COMPLETED U/S 143(3). IN OUR OPINION METHOD FOR R ECOGNIZING ITS INCOME FROM THE PROJECTS UNDERTAKEN THUS WAS CONSISTENTLY FOLLOWED BY THE ASSESSEE AND THE AO WAS NOT JUSTIFIED IN DISTURBING THE SAME AS RIGHTLY HELD BY THE LD. CIT (A). WE THEREFORE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT (A) DELETING THE ADDITION MADE BY THE AO ON THI S ISSUE AND UPHOLDING THE SAME WE DISMISS GD. NO. 1 OF THE REVENUES APP EAL. ITA NO. 3186/M/2010 A.Y 2006-2007 7 6. AS REGARDS GROUND NO.2 IT IS OBSERVED THAT THE ADDITION OF RS. 13 11 915/- MADE BY THE AO ON ACCOUNT OF DISALLOWAN CE OF INDIRECT EXPENSES ATTRIBUTABLE TO WIP ON PRO RATA BASIS HAS BEEN DELETED BY THE LD. CIT (A) FOR THE FOLLOWING REASONS IN PARAGRAPH 4.3 OF HIS IMPUGNED ORDER. 'I HAVE CONSIDERED THE SUBMISSION OF THE REPRESENTA TIVE AND THE STAND TAKEN BY THE AO. THE AO APPORTIONED THE INDI RECT EXPENSES REPRESENTING ADMINISTRATIVE AND GENERAL EX PENSES CLAIMED IN THE PROFIT AND LOSS ACCOUNT. AS CONTEND ED BY THE REPRESENTATIVE ONLY PROJECT SPECIFIC EXPENDITURE C OLD BE ADDED TO WORK-IN-PROGRESS AND NOT THE GENERAL AND ADMINISTRA TIVE EXPENSES. AS PER THE PROJECT COMPLETION METHOD ONL Y THE DIRECT COSTS ARE TO BE ADDED TO THE WORK IN PROGRESS AND N OT THE INDIRECT COST. THE AO WRONGLY APPORTIONED THE GENERAL AND ADMINISTRATIVE COST TO THE WORK IN PROGRESS AND MAD E DISALLOWANCE BY ADDING TO THE TOTAL INCOME. EVEN O THERWISE THE AMOUNT ADDED TO THE WORK IN PROGRESS AND DISALLOWED IN THIS YEAR HAS TO BE ALLOWED AS DEDUCTION IN THE YEAR IN WHICH THE PROJECT IS COMPLETED. BUT THE O WHILE COMPLETING A SSESSMENT FOR A.Y. 2007-08 DID NOT CONSIDER THIS ASPECT WHICH MEA NS THAT HE HIMSELF WAS SATISFIED THAT THE ADDITION WAS WRONGLY MADE IN THIS YEAR BY HIS PREDECESSOR. FOR THE ABOVE REASONS I FIND THAT ADDITION IS NOT JUSTIFIED AND THE SAME IS DELETED. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD WE FIND OURSELVES IN AGREEMENT WITH THE LD. CIT (A) THAT ONLY THE DIRECT COST INCURRED IN RELATION TO THE RE SPECTIVE PROJECTS HAS TO BE TAKEN INTO CONSIDERATION IN THE VALUE OF WORK IN PR OGRESS AND NOT THE INDIRECT COST. THE GENERAL AND ADMINISTRATIVE EXPE NSES WHICH ARE IN THE NATURE OF INDIRECT EXPENSES CANNOT BE TAKEN INTO A CCOUNT TO DETERMINE THE VALUE OF CLOSING WORK-IN-PROGRESS. EVEN OTHERWISE IF SUCH EXPENSES ARE DISALLOWED ON THE GROUND THAT THE SAME ARE RELATABL E TO CLOSING WORK IN PROGRESS THE VALUE OF OPENING WIP FOR THE IMMEDIAT ELY SUCCEEDING YEAR TO ITA NO. 3186/M/2010 A.Y 2006-2007 8 THAT EXTENT WILL GO UP AND THE ASSESSEE WILL BE ENT ITLED FOR DEDUCTION OF THE SAID AMOUNT IN THAT YEAR. AS NOTED BY THE LD. CIT (A) IN HIS IMPUGNED ORDER NO SUCH BENEFIT HOWEVER HAS BEEN GIVEN BY TH E AO TO THE ASSESSEE IN A.Y. 2007-08 WHICH AGAIN GOES TO SHOW THAT THE ADDI TION MADE ON THIS ISSUE FOR THE YEAR UNDER CONSIDERATION WAS NOT SUSTAINABL E. AS SUCH CONSIDERING ALL SUCH FACTS OF THE CASE WE ARE OF THE VIEW THAT THE LD. CIT (A) IS FULLY JUSTIFIED IN DELETING THE ADDITION MADE BY THE AO O N THIS ISSUE AND CONTRIBUTING THE SAME WE DISMISS THE GD. NO. 2 OF THE REVENUES APPEAL. 8. AS REGARDS GROUND NO.3 IT IS OBSERVED THAT THE CLOSING WORK-IN- PROGRESS WAS REDUCED BY THE AO BY 20% ON THE GROUND THAT THE ASSESSEE COULD NOT PRODUCE THE DETAILS OF WIP AS REQUIRED BY HIM. THE SAID DETAILS HOWEVER WERE FURNISHED BY THE ASSESSEE BEFORE THE L D. CIT (A) AND AFTER HAVING SATISFIED WITH THE SAID DETAILS THE LD. CIT (A) DELETED THE DISALLOWANCE MADE BY THE AO ON THIS ISSUE. SINCE N O OPPORTUNITY WAS GIVEN BY THE LD. CIT (A) TO THE ASSESSING OFFICER TO VERI FY THE SAID DETAILS FURNISHED BY THE ASSESSEE FOR THE FIRST TIME BEFORE HIM IT W OULD HAVE BEEN APPROPRIATE TO RESTORE THIS MATTER TO THE FILE OF AO FOR GIVING SUCH OPPORTUNITY IN THE ORDINARY COURSE. HOWEVER KEEPING IN VIEW THE FACT THAT EVEN WHILE COMPLETING THE ASSESSMENT FOR THE A.Y. 2007-08 U/S 143(3) THE AO HAS NOT GIVEN ANY EFFECT TO THE ORDER OF THE AO FOR THE YEA R UNDER CONSIDERATION WHEREBY HE REDUCED THE CLOSING WORK-IN-PROGRESS WE ARE OF THE VIEW THAT NO MEANINGFUL PURPOSE WILL BE SERVED BY RESTORING THIS MATTER TO THE FILE OF THE AO. THE REAL EFFECT OF THE DECISION OF THE AO ON T HIS ISSUE WOULD BE ON THE INCOME OF THE ASSESSEE FOR THE IMMEDIATELY SUCCEEDI NG YEAR I.E. 2007-08 ITA NO. 3186/M/2010 A.Y 2006-2007 9 AND SINCE THE AO IN THE ASSESSMENT COMPLETED FOR TH AT YEAR HAS NOT GIVEN ANY EFFECT TO THE ORDER OF THE AO FOR THE YEAR UNDE R CONSIDERATION ON THIS ISSUE THIS ISSUE IN OUR OPINION HAS BECOME ONLY AC ADEMIC. ACCORDINGLY THE IMPUGNED ORDER OF THE LD. CIT (A) ON THIS ISSUE IS UPHELD DISMISSING GD. NO.3 OF THE REVENUES APPEAL. 9. IN THE RESULT THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED ON THIS 15 TH DAY OF JULY 2011. SD/- SD/- (ASHA VIJAYARAGHAVAN) (P.M. JAGTAP) JUDICIAL MEMBER) ACCOUNTANT MEMBER MUMBAI DATED 15 TH JULY 2011. OKK* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- XXXV MUM BAI 4. COMMISSIONER OF INCOME TAX CONCERNED 5. DEPARTMENTAL REPRESENTATIVE BENCH F MUMBAI TRUE COPY BY ORDER ASSTT. REGISTRAR ITAT MUMBAI